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TSX faces tough results season; global slowdown bites

Canada's stock market has lagged Wall Street most of the year, and investors can expect more of the same as the country's biggest companies start reporting
second-quarter financial results next week.

The earnings season is sure to highlight the scenario that has held Canadian stocks down for months. A limp economic outlook is pulling down commodity
prices and cutting into profits at the energy and mining companies that dominate the country's equity markets.

This week will bring reports from such resource heavyweights as Suncor Energy (SU-T), Barrick Gold (ABX-T) and Teck Resources (TCK.B-T), as well as
Canadian National Railway (CNR-T), which generates revenue by hauling commodities.

Overall, analysts are not expecting much. Companies whose shares comprise the blue-chip S&P/TSX 60 index will report an average quarterly earnings
decline of 0.2 percent from a year earlier, according to Thomson Reuters StarMine SmartEstimates. This compares with the earnings growth of 0.7 percent
that StarMine had forecast ahead of first-quarter results.

"It doesn't take a genius to know that oil was $100 US in the first quarter and it was $85 in the second quarter, so it's not going to be as good," said
Barry Schwartz, portfolio manager at Baskin Financial Services. "The market knows that the commodity names are going to be lousy."

For better or worse, the Canadian market often marches in lock step with commodity prices. That's not surprising given the plethora of energy and mining
companies trading on the Toronto Stock Exchange or the small-capitalization TSX Venture Exchange. Indeed, resources account for more than 40 percent of the
value of the Toronto exchange's benchmark S&P/TSX composite index .GSPTSE.

Commodity prices have weakened along with the growth outlook for major economies such as United States and China, while Europe's debt crisis dims the
outlook worldwide.

"It's a zero to low-growth environment. It'll be a very, very rough patch for Canadian earnings," said Kien Lim, associate equity strategist at RBC Capital
Markets.

The linkage was obvious in May and June when political uncertainty in Greece flared over austerity measures imposed on the debt-strapped country. During
that time, the Thomson Reuters-Jefferies CRB Index .CRB, a benchmark for commodity prices, was down by nearly a third from the highs of 2011.

With its heavy commodity exposure, the Canadian market has fallen off the pace set by Wall Street this year. The S&P 500 index has risen 8 percent,
while the Toronto benchmark index has dropped 3 percent.

The first wave of S&P 500 second-quarter results suggests that Bay Street is unlikely to catch up anytime soon. So far on Wall Street, about 72 percent
of the companies reporting have exceeded expectations, according to StarMine data.

In Canada, only 5 percent of companies on the TSX 60 have reported so far, so it's too early to compare. Still, optimism is in short supply north of the
border going into the first big week.

Energy is one of the softest spots. Share prices in the sector have fallen nearly 10 percent this year as the price of oil plummeted from a peak above $110
a barrel in the first quarter to under $80 in June.

The strongest profit growth on the TSX 60 is expected to come from health care, traditionally viewed as a defensive sector. Solid results are also expected
from industrial, financial and consumer discretionary companies. Technology, utilities, consumer staple and telecom results are viewed as likely laggards,
according to StarMine.

"This earnings season is going to be rather lackluster. I think the focus is not going to be so much on earnings this season, rather, it's going to be on
the outlook," said Jennifer Dowty, portfolio manager at Manulife Asset Management.

INVESTORS HOPE FOR STIMULUS

The major hope for Canadian companies and the investors who hold them is that the U.S. Federal Reserve and other major central banks move quickly to jolt
economies back to health.

Chinese efforts to reverse a growth slowdown in Asia's biggest economy could also give the Canadian market a lift before the end of the year, said Stephen
Lingard, managing director at Franklin Templeton Multi-Asset Strategies.

"There is no hard landing in China, and ultimately that will factor and feature in the third and fourth quarters of this year," he said.

Analysts said one of the few positives about the second-quarter is that Canadian investors have already priced in much of the bad news, leaving the
potential for surprise gains.

"The market is set up for horrendous earnings and if we come somewhere above that level it's going to be taken as good news," said Baskin's Schwartz.